HELLO ALL, the below story is enough to make your eyes glaze over but bottom line a proposed (trial balloon?) 50% increase for all gov workers state, local, school. There are a few eye popping quotes in there. Maybe you should tell them what you think.

“Under the current rate policy, the funding level in 30 years is projected to reach 79 percent for most state workers, 86 percent for most local governments and 82 percent for non-teaching school employees.”

“Even with the proposed new rate policy, the CalPERS funding level has a 52 percent probability of dropping below 50 percent during the next 30 years, according to 1,500 projections of randomly simulated investment returns.”

OK I have been a mathematician all my life. I love Monte Carlo methods! Some of the hardest problems I have ever encountered have been solved at least in all practicality by Monte Carlo methods. But to simplify. The people who are running Calpers even with their new payment schedule are gambling on the flip of a coin. Heads (48%) and Calpers wins. Tails (52%) and Calpers loses, since it is generally believed that pension funds falling below 50% will never regain viability. If they do nothing, of course, then the situation will get much worse.

The CalPERS board last week tentatively approved an employer rate hike of roughly 50 percent over the next half dozen years, replacing a policy that kept rates low during the recession with a plan to reach full funding in 30 years.

While giving unanimous “first reading” approval to the proposal by Chief Actuary Alan Milligan, the board asked for more information before final approval scheduled next month.

“Any addition to the schools (rate) is likely to result in layoffs to employees,” said the board president, Rob Feckner, who represents the largest group of CalPERS members, non-teaching employees in 1,488 school districts.

Feckner’s request for options for a “longer horizon” for phasing in the rate increase, softening the blow to employers, was joined by Treasurer Bill Lockyer’s representative, Grant Boyken, and board member Michael Bilbrey.

The proposal for a new actuarial method would show state and local government employers the new rate plan in their next annual valuation report. But a five-year phase in of the rate increase would not begin until fiscal 2014-15 for state and school employers.

City of Eureka’s Validation Action and Reverse Class Action Lawsuit

People of Eureka! You Are About to Be Stripped of Your Constitutional Right to Vote – Forever!

Quietly on election night the Eureka City Council passed by 5-0 vote an ordinance to send a so-called “validation” action to the local Superior Court, in essence filing a class action lawsuit against all Eureka residents. The purpose of the action is to “validate” the sale of 10 year “Pension Obligation Bonds” that will refund the current short term obligation due CalPERS but also to circumvent the requirement in the Constitution of the State of California that debt of term longer than one year must be approved by 2/3 majority of the citizens. If this “validation” action goes forward, and some local Humboldt judge rubber stamps it, then you and all your fellow Eurekans will FOREVER be denied the right to vote on ANY PENSION OBLIGATION BONDS OF ANY TERM, TYPE, OR DURATION. This is a ponzi scheme and its desperation hints at severe financial problems ahead for the city of Eureka. It is a long step down the road to municipal bankruptcy.

One weak justification the Council gave for denying Eureka residents the right to vote on the bonds was to save the taxpayers the cost of a special election. Compared to the “fees” of almost a half million $ to be paid to the financial parasites. Um Hmm.

Oh and in case you weren’t aware of it, you were sued too. It’s a rare unusual reverse class action lawsuit where the “class” are the defendants. (That’s right, you and me.)

I filed an “answer” against the suit. Now I must pay a filing fee of $435 by Jan. 17th, so I need donations to help with that. We need to address the issue of how the poor and the modest of means access the legal system. It seems like the rich and powerful have no problems with it.

I need some help, but it can’t divert help from the Eureka Fair Wage Act either. That is critical.

I may have been the only one in the city who answered it, I don’t know. I would like some pro bono legal help. I have a few arguments I want to make against this legal blackmail but I am not a lawyer and don’t have much experience in court.

This issue of kicking the can down the road and making future generations pay for our stuff. I hate it. I want to leave a better world for our children and grandchildren. We cannot wage war on future generations!

Yes I am aware that this issue cuts across normal political and party divides.

People may disagree over how good a deal these bonds are. I think they are a shitty deal that will cost the taxpayers over a million dollars more than simply paying off calPers in five years. Plus it will needlessly funnel almost a half million dollars in “fees” to Wall St. parasites. Its ok if you disagree with me on this.

The point is that I believe the people both do and must have the right to vote their approval up and down on this kind of long term bond. If we get to vote on these and the voters approve them, I won’t have any complaint. I will still think they are shitty bonds, but the voters will have spoken.

If you can help me in this please email me @ humboldt.organizer@gmail.com Without your help it will be hard to continue, unless someone unknown to me has also filed an answer. Again I need a few $ for fling fees and if possible some pro bono legal help.

Thanks,

Bill Holmes

Answer to the Unconstitutional Actions of the City of Eureka – Pension Obligation Bond Validation

imagine the audacity of a city council,

a city manager and a city attorney,

willing to sue all the citizens of the city

and anyone else who has an interest

all in order to circumvent the Constitution of

the State of California

Because they know damn well that the citizens

will not approve this bullshit bond issue.

what they are trying to do is convince a judge and everyone else that short term obligations owed to CalPERS are “bonds” that can be refunded without voter approval as is required under the Constitution of the State of California. These are not bonds that are being refunded. This is fiction.

Refinancing short term obligations with long term bonds defines fiscal irresponsibility and is indicative of serious problems in the finances of the City of Eureka.

At the very least the voters of Eureka should be given the chance to vote on this bond issue.

They have said that they don’t want to vote because of the “cost to the taxpayers” of an election. Yet, they are going to pay some Wall St. parasites almost $500,000 in fees to float this bullshit bond issue.

what they are trying to do is convince a judge and everyone else that short term obligations owed to CalPERS are “bonds” that can be refunded without voter approval as is required under the Constitution of the State of California. These are not bonds that are being refunded. This is fiction.

Refinancing short term obligations with long term bonds defines fiscal irresponsibility and is indicative of serious problems in the finances of the City of Eureka.

At the very least the voters of Eureka should be given the chance to vote on this bond issue.

They have said that they don’t want to vote because of the “cost to the taxpayers” of an election. Yet, they are going to pay some Wall St. parasites almost $500,000 in fees to float this bullshit bond issue.

UPDATE. I went to court on Monday it was a case management conference. I asked Judge Reinholsen to appoint competent counsel to assist me due to the complexity of the case. The judge indicated that I need to file a motion. I plan to do so by monday. I also pointed out to the judge that the Superior court might not be the proper venue for this suit. The problem as I see it is the vagueness (and potential size) of the named defendent class “All PERSONS INTERESTED” could mean that the proper place for this suit is federal court, since it involves due process and the constitutional right to vote. The vagueness and broadness of the defendent class in this bizarre reverse class action lawsuit almost guarantee a lack of due process for someone. Indeed it seems like it will be hard to empanel an impartial jury that is not part of the defendant class.

I am asking for a jury trial. I will file a motion monday to do so, and I have included my request in my case management statement. I have been told that I must pay $150 in “jury fees” in order to have a jury trial when the city has sued me! Think about that citizens! I have obtained another fee waiver (I have one for the trial now i need a separate one for the “jury fees!”

Anyone who wants to join in a court action against this illegal bond issue please email me at humboldt.organizer@gmail.com put “bogus bonds” in the subject. I understand that opposition to this illegal bond issue will cut across the normal political divides. I am a libertarian socialist but when it comes to government I am a fiscal conservative.

have peaceful day, Bill

update DEC 21. I received this email from Mr. David Mix, ccd to Hank Sims, Paul Rodrigues and Ms. Day-Wilson.

Firstly, allow me to openly thank Mr. Rodrigues for responding to my inquiry concerning Eureka’s proposed POBs. However, his contention that the proposed Validation (CCP 860) Pension Bond petition language is somehow standard verbiage, is disingenuous at the least and bordering on deceit. There simply is no such thing as standard language employed in Pension Bond Validation Petitions or procedures – they very considerably depending on the presumed municipalities’ needs and the document drafters.

The concept of a “Validation action” permitting any type of bond issue humanly possible and extending it into the depths of an unknown future, is duly credited to and promulgated by Orrick, Herrington & Sutcliff LLP, (believed to be the leading authority on Pension Obligation Bonds) and Eureka’s Bond Counsel. The City of Eureka Validation filing (Complaint For Validation, No. DR120811, Dated Nov. 21, 2012) is the epitome of a “Blank Check”. It is completely “open-ended” with “no holds bared” and most assuredly designed to be exactly that.

With this Validation the City of Eureka need “never” come back to the people of your community for approval of any future kind or type of financing of City employees pension benefits. By this Validation action you give up your rights forever. But of course (as prompted by Mr. Rodrigues) you wouldn’t want to tie the hands of future City Councilmembers.

Without citing particular parts of the City Attorney’s filing, paragraph No. 15 (page 4) and First Cause of Action, Para No. 26, subparagraph “b.” (page 7), pretty much sums it all up by including every type of bond issue known to man. Additionally, please take note – re Para No. 15 must be read with extreme caution. The stipulation that Bonds will not exceed six percent (6%) or exceed thirty years (30 yrs) is patently false. Firstly, a stated annual percentage rate is a misnomer. Regardless what is stated the rate is dependant on the term length, the amortization schedule, and other factors. The real or actual rate is largely dependant on the pay -back schedule. As most people know, loans (bonds) that are end loaded or with end balloon payments with no periodic principle payments (although at the same rate) end up costing a great deal more in interest. As has been recently revealed, the School District’s CABs real interest rate (actual pay-back) can go through the roof. There is absolutely no way of determining the real interest rate without a complete “Maturity Schedule” (actual amortization of entire amount of principle and interest over the full term).

The 30 year stipulation is as phony as the 6% interest rate. While permitting rewrites, extensions, new and additional issues, adjusting rates, etc., etc., in the same Validation document, the possibilities are unlimited. Oakland, Stockton, and other cities are prime examples of the blatant manipulation that is possible. See City of Oakland City Auditor Report. As far as I know, the City has not provided or included any such bond payment schedule in its petition for Validation nor has it provided one for public review.

Lastly, the issue is not necessarily whether or not the proposed pension bonds are good or bad, but rather, do the City taxpayers have or deserve the right to vote on the issue as provided for by the (1879) California Constitution, Article XVI, Section 18. The City says NOT, and is attempting to circumvent the Constitutional requirement with its CCP Validation Action and by erroneously claiming the “obligation is imposed by law”, (Para. No. 8, page 3 and elsewhere) and is therefore exempt from the Constitutional 2/3 vote requirement. The City is simply wrong – clearly, the City’s obligation to its employee pension system (Cal PERS, or whatever) is not an, “Obligation Imposed By Law” and thus, NOT EXEMPT from the Constitutional requirement. (See: State ex re. Pension Obligation Bond Com. v. All Persons Interested etc. City. (2007) 152 Cal.App.4th 1386; 67 Ops.Cal.Gen. 349,351 (1984); County of Orange v. Association of Orange County Deputy Sheriffs et al. (2011) 192 Cal.App. 4th 21). The City is gambling that no one will bother to file an opposition to their Validation Petition and the court will simply rubber stamp it. Respectfully submitted for your consideration.

David E. Mix

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The Eureka City Council is attempting to issue Pension Obligation Bonds (POBs) without getting the 2/3 approval of the voters, as is required by state law. They are doing this by suing *everyone* in a local court using a technicality. If they get away with this scam, it will be coming to YOUR TOWN SOON.

As a member of the class of citizens being sued by my own city I hereby request that this lawsuit be moved into the jurisdiction of Federal Court under provisions of the Class Action Fairness Act of 2005, since this involves an amount greater than $5,000,000 and other thresholds may easily be confirmed.

ALL PERSONS INTERESTED IN THE MATTER of the Issuance and Sale of Bonds
for the Purpose of Refunding Certain Obligations that the City of
Eureka Owes to the California Public Employees Retirement System Arising
Under Section 20000 et seq. of the California Government Code, and of
the Certain Proceedings Leading Thereto, Including the Adoption of a
Resolution that Authorizes the Issuance of Taxable Pension Obligation
Funding Bonds and the Execution and Delivery of an Indenture Relating to
the Issuance of Such Bonds, Defendants. NOTICE! YOU HAVE BEEN SUED

The real question we need to ask is “Is the City of Eureka bankrupt?”

First of all if you have never been to this Highboldtage blog, I am no right wingnut antitax crusader. I am a libertarian socialist heavily involved in the Eureka Fair Wage Act campaign to raise the minimum wage here to $12 an hour for big employers. http://fairwages.org

What is going unsaid is that CalPers has set the 7.5% interest rate that high in order to benefit cities like Eureka. If CalPers lowers their anticipated rate of return, then Eureka along with other cities will have to raise its contribution in order to make up the difference.

You see how this works?

How many of you think that CalPers will actually have a 7.5% compounded positive annual return on their portfolio ten years from now? C’mon class, Raise your hands.

At the stated 7.5 per cent expected return Eureka is substantially underfunding its pension liabilities each year and it is compounding underfunding that is outstripping interest growth.

Now they are secretly trying to convert this chronic underfunding into long term debt and without fixing the underlying problem.

You need to do something, make the tough choices. Raise taxes, cut spending, or a combination of the two, do something besides kick the can down the road.

And at the least you need to give the taxpayers a chance to vote on this. What the fuck? All these 2/3 tax raise thresholds are there because you republicans wanted them.

The city of Eureka apparently owes $7.8 million to CalPers. How this happened is of course a matter of dispute. But no one seems to dispute that it is a valid obligation. It could be paid off entirely in five years if the city made monthly payments of $156,296 for a total cost including interest of $9,377,760 and an interest cost of $1,577,760. Contrast this with a 10 year bond for $8.2 million @ 5 per cent interest. You will pay back a total of $10,436,846 and change in 120 monthly payments of $86,974. That is an interest cost of $2,636,846 to the taxpayers, almost twice as much as simply tightening our belts and paying this obligation off. You would be paying an extra $70,000 a month for five years, and then you would have five years of no payments (you would be done.) You would save over a million dollars over this bogus junk bond scam.

When you and I are faced with a financial shortfall, we either cut our expenses or try to raise our income. If we are sane we don’t take out a 10 year loan to buy groceries. In the municipal government context, this means either cutting expenses or raising taxes. I know these are tough choices but you told us how tough and smart you were when you ran for office.

So when David Tyson and certain members of the Eureka City Council and Mr. Paul Rodrigues tells you this bullshit will save money, they are lying to you. They know better.

Here’s an idea. An extra 1% sales tax in the city of Eureka for the next five years and use the proceeds to pay down the (current) CalPers obligation.

We could call it the “Pension Obligation Tax” or POT tax for short.

It still won’t solve the underlying problem but at least it won’t cost the taxpayers $2,000,000 in unneccesary interest payments to wall street parasites.

Do you get it? The interest paid to CalPers actually helps fund Calpers while the interest paid on long term Pension Obligation Bonds (POBs) is paid to speculators, interest arbitragers, thieves and wall street parasites.

This is one instance where the interests of the workers and the interests of the taxpayers are clearly aligned.

Just tighten your belt, and pay off CalPers in five years. The interest you pay to CalPers will in the long run be in your best interest. And you will save the taxpayers over a million dollars, or about 590 oz of the pretty yellow metal at todays quote.

have a peaceful day,

Bill

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SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF HUMBOLDT CASE NO. DR120811 AMENDED SUMMONS (CITATION JUDICIAL) CITY OF EUREKA Plaintiff, V. ALL PERSONS INTERESTED IN THE MATTER of the Issuance and Sale of Bonds for the Purpose of Refunding Certain Obligations that the City of Eureka Owes to the California Public Employees Retirement System Arising Under Section 20000 et seq. of the California Government Code, and of the Certain Proceedings Leading Thereto, Including the Adoption of a Resolution that Authorizes the Issuance of Taxable Pension Obligation Funding Bonds and the Execution and Delivery of an Indenture Relating to the Issuance of Such Bonds, Defendants. NOTICE! YOU HAVE BEEN SUED. THE COURT MAY DECIDE AGAINST YOU WITHOUT YOUR BEING HEARD UNLESS YOU RESPOND NOT LATER THAN JANUARY 3, 2013, WHICH IS TEN (10) DAYS OR MORE AFTER COMPLETION OF THE PUBLICATION OF THIS SUMMONS. READ THE INFORMATION BELOW. AVISO! USTED HA SIDO DEMANDADO. EL TRIBUNAL PUEDE DECIDIR CONTRA USTED SIN AUDIENCIA A MENOS QUE USTED RESPONDA NO MAS TARDE QUE EL DIA 03 DE ENERO DE 2013, QUE ES DIEZ (10) DIAS O MAS DESPUES DE TERMINACION DE PUBLICACION DE ESTA CITACION JUDICIAL. LEA LA INFORMACION QUE SIGUE.

TO ALL PERSONS INTERESTED IN THE MATTER OF THE ISSUANCE AND SALE OF BONDS FOR THE PURPOSE OF REFUNDING BONDS THAT FUNDED OR REFUNDED CERTAIN OBLIGATIONS THAT THE CITY OF EUREKA OWES TO THE CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM ARISING UNDER SECTION 20000 ET SEQ. OF THE CALIFORNIA GOVERNMENT CODE, AND CERTAIN PROCEEDINGS LEADING THERETO, INCLUDING THE ADOPTION OF A RESOLUTION THAT AUTHORIZES THE ISSUANCE OF TAXABLE PENSION OBLIGATION FUNDING BONDS AND THE EXECUTION AND DELIVERY OF AN INDENTURE RELATING TO THE ISSUANCE OF SUCH BONDS: Plaintiff has filed a civil complaint against you. You may contest the validity of the above matter by appearing and filing with the Court a written responsive pleading to the complaint not later January 3, 2013, which is ten (10) days or more after the completion of the publication of this summons. Your pleading must be in the form required by the California Rules of Court. Your original pleading must be filed in this Court with proper filing fees and proof that a copy thereof was served on Plaintiff’s attorney. Unless you so respond, your default will be entered upon Plaintiff’s application, and the Plaintiff may apply to the Court for the relief demanded in the complaint. Persons who contest the validity of the matter described below and in the complaint will not be subject to punitive action, such as wage garnishment or seizure of their real or personal property.

DETAILED SUMMARY OF THE MATTER THAT PLAINTIFF SEEKS TO VALIDATE: The City has contracted with the California Public Employees Retirement System (“System”) pursuant to the Public Employees’ Retirement Law commencing with Section 20000 of the Government Code of the State of California, as amended (the “PERS Law”) to provide its employees with pension benefits. The City participates in separate risk pools within the System for the City’s fire and police retirees, pursuant to which the System has established “side funds” (“PERS Side Fund Obligations”) which are obligations to be funded by the City pursuant to a contract between the City and the System dated April 1, 1970, as amended thereafter from time to time (the “PERS Contract”). The PERS Law obligates the City, among other things, to: (a) make annual contributions to the System to fund the value of pension and other retirement benefits for City employees (the “Normal Contribution”); (b) amortize the unfunded accrued actuarial liability of the City under the PERS Law, which is the liability that the System’s actuary has determined to have accured under the PERS Law, but which the City has not yet paid to the System (the “Unfunded Liability”); and (c) appropriate funds for the purpose of making such contributions and meeting the City’s obligation to the System under the PERS Law. The obligation of the City to make contributions to the System pursuant to the PERS Law represents an obligation imposed by law and, as such, the City is required to satisfy such obligation from any money available in the City’s treasury. The City’s obligation to make payments to fund such retirement benefits is exempt from the debt limitation of Article XVI, Section 18 of the California Constitution. On November 6, 2012, after public notice, the City council of the City of Eureka (the “Council”) adopted the Resolution No. 2012 (the “Resolution”). The Resolution authorized the issuance of pension obligation bonds in one or more series (the “Series 2013 Bonds”) and the issuance of future additional pension obligation bonds in one or more series (the “Additional Bonds”). As authorized and approved in the Resolution, the City will issue the Series 2013 Bonds (in an aggregate principal amount not to exceed $8,250,000, an interest rate not to exceed 6% per annum and a maturity date not later than 30 years from the date of issuance). Pursuant to the Resolution, Additional Bonds shall be issued pursuant to a Supplemental Indenture subject to limitations contained in the Indenture and Resolution. Pursuant to the City’s obligation to the System under the PERS Law, the City must pay the System interest on its Unfunded Liability at an interest rate established from time to time by the System in consultation with the System’s actuary. As of June 30, 2012, based upon the actuarial report issued by the System, the PERS Side Fund obligation of the City is approximately $7,782,683. The City desires to issue Series 2013 Bonds in an aggregate principal amount equal to the sum of (a) the principal amount not to exceed the total combined amount of the PERS Side Fund obligations, (b) the costs of issuance of the Series 2013 Bonds (including underwriters’ discount), and (c) the original discount (if any) on the Series 2013 Bonds, for the purpose of refunding the PERS Contract and thereby providing funds for the System to invest. In addition, the City desires to authorize the issuance of the Additional Bonds for the purpose of refunding any additional obligations under the PERS Contract in the future from time to time. The City has filed this validation action to obtain a judicial declaration of the validity of the matters alleged in the City’s Complaint and described herein. In this action, the City seeks a declaration from the Court that, among other things, all proceedings by and for the City in connection with the Resolution, the Series 2013 Bonds, any future Additional Bonds, and the other related agreements, all as described in the Complaint and as authorized by the City pursuant to the Resolution, were, are and will be valid, legal, binding and enforceable in accordance with their terms, and that the Series 2013 Bonds, any future Additional Bonds, and the other agreements authorized in connection therewith, are obligations imposed by law and are valid, legal and binding obligations of the City under the Constitution and laws of the State of California.

Jeffrey A. Michael, a finance professor in Stockton, Calif., took a hard look at his city’s bankruptcy this summer and thought he saw a smoking gun: a dubious bond deal that bankers had pushed on Stockton just as the local economy was starting to tank in the spring of 2007, he said.

The City of Stockton, Calif., sold about $125 million in bonds to try to close a shortfall in its pension plans for city workers like police officers.

The plan was unsuccessful, and the city is now in Chapter 9 bankruptcy.

Stockton sold the bonds, about $125 million worth, to obtain cash to close a shortfall in its pension plans for current and retired city workers. The strategy backfired, which is part of the reason the city is now in Chapter 9 bankruptcy. Stockton is trying to walk away from the so-called pension obligation bonds and to renegotiate other debts.

Financial analysts and actuaries say essentially the same pitch that swayed Stockton has been made thousands of times to local governments all over the country — and that many of them were drawn into deals that have since cost them dearly.

The basic premise of all pension obligation bonds is that a municipality can borrow at a lower rate of interest than the rate its pension fund assumes its assets will earn on average over the long term. Critics contend that municipalities that try this are in essence borrowing money and betting it on the stock market, through their pension funds. The interest on pension obligation bonds is not tax-exempt for this reason.

Stockton got a similar pitch in 2007 — that it could issue municipal bonds with a lower interest rate than the California state pension system, known as Calpers, expected its investments to return annually, on average.

After laying out this daunting situation, the Lehman bankers said there was a way out: Stockton could raise the $152 million all at once in the municipal bond market, send the money to Calpers and get rid of the unpayable loan. The municipal bond market would charge Stockton just 5.81 percent interest. The city would come out way ahead.

Calpers’s investments lost about 25 percent of their value in the financial turmoil that began in 2008. That meant the city had a new debt to Calpers, compounding at 7.75 percent, on top of its debt to the bondholders. Stockton was worse off than ever, with 29 more years to go.

The company that insures the bonds, Assured Guaranty, will make the bondholders whole, but the policy it issued allows it to file a claim in bankruptcy against Stockton for the money it pays the bondholders.

Dec 11 (Reuters) – Municipal bonds that states and local governments use to pay for some of their public pension obligations rarely improve the issuer’s credit quality, Moody’s Investors Service said on Tuesday.

“If bond proceeds substitute for annual contributions to pension plans or are used to pay pensioners, we consider it a deficit borrowing and would view the financing as credit negative,” Marcia Van Wagner, the senior Moody’s analyst who wrote the report, said in a statement.

The negative credit implications hold especially true if the borrowing is large relative to the issuer’s budget, for example over 5 percent.

“Pension bonds are often a red flag associated with greater rigidity of long term obligations, failure to find sustainable solutions to pension funding and a pattern of pushing costs off into the future,” said Van Wagner.

Pension Obligation Bonds: Financial Crisis Exposes Risks

by Alicia H. Munnell,Ashby Monk,Jean-Pierre Aubry andThad Calabrese.

SLP#9 .

The brief’s key findings are: •Some state and local governments issue Pension Obligation Bonds (POBs) to raise cash to cover their required pension contributions. •POBs allow governments to avoid increasing taxes in bad times and could reduce pension costs, but they pose considerable risks. •Those who issue POBs are often fiscally stressed and not well-positioned to handle the investment risk.

Surprisingly, POBs re-emerged in the 1990s. The 1strong performance of the stock market led some governments (and bankers) to see a potential arbitrage opportunity for taxable POBs. Two factors were important. First, taxable interest rates had come down considerably, which meant that POB borrowing costs were lower as well. Second, pension funds had increased their equity holdings substantially over the decade,9 which generated higher returns for the plans and, thus, led actuaries to assume higher future returns. The combination of these two factors was enough to convince some governments that POBs offered an attractive “actuarial arbitrage.”

While the actuarial arbitrage highlighted above may be persuasive, the issuance of POBs poses serious risks:

1) Financial: The success of POBs depends on the premise that pension returns are on average more than the cost of financing the debt. However, these assumptions may not turn out to becorrect, as the recent financial crisis has shown. Even over 15 to 20 years, the duration of most POB debt, interest costs can exceed asset returns.

2) Timing: POBs involve considerable timing risk, as the proceeds from the issuance are invested en masse into the pension plan. Dollar-cost averaging would be the more measured approach to investing large sums of money. Alternatively, some suggest that governments should issue POBs only during recessions, when stock prices are depressed. However, this requires having some sense of what the “top of the market” or the “bottom of the market” looks like.

3) Flexibility: While the issuance of a POB does not change the total indebtedness of the sponsor, it does change the nature of the indebtedness. Requirements to amortize unfunded pension liabilities may be relatively flexible obligations that can be smoothed over time, while the POB is an inflexible debt with required annual payments.

4) Political: If the government uses the POB to fully fund the pension, it may end up with a pension system having more assets than liabilities. Such overfunding may create the political risk that unions and other interest groups will call for benefit increases, despite the fact that the underfunding still exists; it was just moved from the pension plan’s balance sheet to the sponsor’s balance sheet.

California Government Code Sections 53550-53569

California Government Code Section 53550 The following terms shall have the following meanings: (a) “Local agency” means public district, public corporation, authority, agency, board, commission, county, city and county, city,…

California Government Code Section 53551 The legislative body of any local agency may issue negotiable coupon bonds, to be denominated refunding bonds, for the purpose of refunding any of the…

LOS ANGELES/ SAN FRANCISCO, Dec 14 (Reuters) – A high-stakes legal battle intensified Friday as the largest U.S. pension fund filed court papers denouncing the financially troubled California city of San Bernardino for what it called a “sham” bankruptcy and accused the city of “criminal behavior” in withholding payments to the pension plan.

The city benefits from robust employment and a vibrant property tax base, and its financial outlook is “stable” yet uncertain in light of “low pension funding and reserve levels relative to similarly-rated entities,” according to Fitch Ratings.

The Oregonian on December 15, 2012 at 9:02 AM, updated December 15, 2012 at 10:18 PM

Next year in Salem, the governor will be push some systemic PERS reforms, but lawmakers support will be critical for any passage.

Randy L. Rasmussen/The Oregonian

Towns, school boards and agencies are scrambling to forestall more layoffs, furloughs and service cuts next year as they face a 45 percent spike in costs to bail out Oregon’s underfunded public pension system.

Gov. John Kitzhaber is pursuing the fiscal discipline route, proposing cuts to the Public Employees Retirement System to offset the extra $900 million in employer charges slated to kick in July 1. There’s no assurance, however, those fixes will make it past reluctant lawmakers or be deemed legal when challenged by PERS members.
That leaves employers seeking alternatives.

There is a short-cut, one that delivers immediate dividends to cash-strapped public agencies, with the prospect of meaningful long-term savings.
It’s called a pension obligation bond. And public employers in Oregon may be ready to travel this hazardous path again.

Creditor: Stockton city manager, staff put self interest first

By The Record

December 18, 2012 12:00 PM

STOCKTON – A creditor seeking to block Stockton’s bankruptcy in its most recent arguments takes a shot at City Manager Bob Deis and his management team, accusing them of putting their personal interests first.

National Public Finance Guarantee Corp. argues that Deis opted not to take on California Public Employees’ Retirement System because as city officials he and his executive team personally are members of the retirement fund. This tainted their decisions, National Public Finance says in court papers.

1) Validation Action – The City’s Validation action in 1996, City of Oakland vs. All Persons, Case No. 772719-7 (as noted in the staff report), is not valid or binding for any other purpose except for the 1997 Bond Series Issue for which it was filed and to have judicially approved. California Code of Civil Procedures, Section 860 et. seq. clearly does dot allow for, or provide for, hypothetical or non determined future public agency actions to be pre-piggy-backed or pre-packaged and pre-validated as a single judicial action as the City is presently attempting to do with the present Bond Issue Resolution and Ordinance.

As is expressed in the Finance and Management Report the judicial order is by “default” (no opposing party and going unchallenged). It is also understood that the City authored the default order which was written and designed to apply to not only the action filed August 28, 1996 but to all other like pension bond proposals (issues) in the near or far flung future. Be that as it may and besides the City’s best efforts – it can’t be done. The 1996 filing was a “single” Validation Action, and there are no other kinds. The 1996 validation (of the then 1997 $436.3 million Bond issue) clearly cannot be arbitrarily held to encompass any and all possible future actions of or by the City simply because they may vaguely relate to the PFRS Fund or System.There simply is nothing under the law or precedence to allow or even entertain such a far flung notion. Lastly, the “default” order and the Superior Court case does not represent any kind of hearing or judicial inquiry nor determination (factually, there was no hearing or case heard by the court) or in depth analysis of the issues. Lastly, the lower court does not hold the weight of the appellate court or the supreme court and clearly the 1996 default ruling may not be cited or relied upon in any future legal challenge.

2) Property Owner Override Taxes – The City cites Valentine vs. City of Oakland (1983) 148 Cal.3d 139, as authority to assess and collect the 0.1575% in property tax revenue to meet its obligation to support the (now closed) Police and Fire Retirement System (PFRS). However, the Court ruling does not provide that the City may or is permitted to use those specific tax funds to pay or support pension bonds, the principal and interest or to service the bond issue in any other way. The tax revenue is strictly restricted to the “system”, pensioners direct retirement payments and benefits. There is absolutely no law or precedence that allows those funds to be used for any other purpose other than as expressed in Valentine.

The Valentine decision (1983) predates the first Pension Obligation Bonds (1985) as introduced by the City of Oakland, thus there is nothing found in Valentine that specifically addresses the pension bond issue or that can be said to sanction or approve it. As a practical matter it is absurd to contend that the City may legally use tax revenue (public funds) assessed and collected for a very specific and limited purpose (Police and Fire Retirement System) for any other purpose other than the original intent. To use those funds to speculate on the open stock market, engage in questionable interest rate SWAP agreements, or to support bond Issues or the service thereof, or the proceeds thereof, which are in turn used for market speculation, must not be permitted and cannot be permitted. It is unquestionably a misuse of public funds.

Unfortunately, there is a clear indication that the City has been using those funds to service several different bond issues (pension obligation bonds, New York Life annuity purchases, SWAP agreements, convoluted transactions (lease backs etc.) between the Redevelopment Agency and the City, etc.) and, additionally using portions of the override tax and bond proceeds to pay Cal PERS premiums along with other non-authorized expenditures. It is estimated by the Retired Oakland Police Officers Association (ROPOA) that the City of Oakland has diverted (misused) more than $450 million in NYL Annuity proceeds, in violation of the NYL Annuity agreement, laws governing pension funds, and clearly the provisions of the Valentine Court. See ROPOA request for an Independent Inquiry Regarding the Expenditure and Use of New York Life Annuity Reserves (February 21, 2012).

3) Override Tax “Reserve Fund” – The City has unlawfully created a Tax Override Reserve fund in excess of $115 million which it used this past year to pay down its obligation to the system or to service the outstanding bonds. As in #2 above there is nothing under the law or precedence that allows reserves or the stockpiling of excess funds or the purposeful collection of excess funds in order to create reserves or stockpiling. All funds assessed and collected are to be strictly used in support of the system (the fund) and specifically for retirement benefit payments. The City is not legally permitted to assess or collect excess override tax funds beyond or over and above what is proven to be needed to fund the system for direct retirement payments. The Override Tax may only be used for a pre-determined voter approved financial support mechanism of the PFRS fund and any annual excess amounts assessed and or collected must be returned to the taxpayer. Lastly and in addition, funds are prohibited from being used for enhanced benefits over the original provisions of the voter approved system.